Economy showing signs of fatigue

By Huang Tien-lin 黃天麟 /

Thu, Aug 23, 2012 - Page 8

The economic marginalization of Taiwan has not just started; it has been growing gradually since 2000, when the government abandoned the road toward a free economy and instead started working together with countries such as the US and Japan on the road toward integration with China’s economy.

One of the problems Taiwan faces is its constantly declining world export ranking. In 1999, Taiwan’s exports were ranked No. 14 in the world, but by last year they had dropped three places to No. 17. During the same period, South Korea’s ranking rose from No. 12 to No. 7. China performed even better over the same timeframe, rising from No. 9 to the top position. As a consequence, Taiwan’s regional importance has declined, it has slipped from the top to the bottom among the four “Asian Tiger” economies and has become marginalized due to its flagging political and economic influence.

Taiwan’s exports performed even worse between January and last month, suffering a contraction of 5.8 percent, the worst in the region. This should not be blamed on the European debt crisis nor the US economic downturn because these affect all economies worldwide. The question is: Why is Taiwan’s economy slowing so much faster than its neighbors?

The answer lies in the direction that the nation is taking. Since President Ma Ying-jeou (馬英九) came to power in 2008, he has taken an even more active approach than former president Chen Shui-bian’s (陳水扁) “active opening” policy by moving toward ever-closer integration with China to form a “one China market.”

Marginalization is the phenomenon by which a smaller economy becomes absorbed into a larger economy due to the latter’s market advantages. Because Taiwan’s economy was more developed than China’s, Taiwanese capital, talent and technology quickly flowed to China when policy restrictions were relaxed. This period — the first phase of Taiwan’s marginalization — was characterized by a constantly increasing overseas production ratio and export reliance on China, ie, investment drove exports. This crowded out domestic investment and job opportunities, which caused wages to stagnate and domestic consumption to slow, suppressing economic growth.

Although Taiwan’s economy is highly developed, there are limitations. Its competitive advantages have weakened due to a lack of domestic investment, difficulties in industrial transformation and laziness among Taiwanese businesses, which fail to innovate because it is easier to duplicate the past mode of operation in China. Meanwhile, the country’s import substitution industry has become increasingly complete thanks to the investment of Taiwan’s upper and mid-stream manufacturing sectors in China. The past method of investing in China to boost exports no longer works, and, as a result, Taiwan’s overall economic structures are facing total collapse.

Taiwan’s exports to China as a proportion of its total exports, also known as the export reliance ratio, might now begin to reverse and start to drop, while investments in China might also shrink after having plateaued just after the signing of the Economic Cooperation Framework Agreement (ECFA). In the future, tourism, gaming and cultural and innovation industries are likely to become the main focus of Taiwan’s economy, forcing the nation’s economy into the second stage of its marginalization.

The government must change its pro-China economic development strategy in a timely manner. If it does not, no amount of global market expansion plans will be of any use. The recent rapid export decline is likely just the beginning of this, the second, phase.